Sebi faced its worst credibility crisis last year. Will 2012 be different?

Sucheta Dalal

It is that time of the year when we take stock of the past 12 months and make plans for the New Year. From the capital market perspective, 2011 is a year that is probably best forgotten, due to domestic and global factors. The world economic crisis deepened and the Indian economy as well as the capital market felt its reverberations. Corruption scandals, public interest litigation (PIL), judicial activism, the arrest of powerful politicians and industrialists, and an unprecedented middle-class uprising under Anna Hazare’s leadership, all contributed to keep corporate India as well as the stock prices of listed companies nervous and volatile.

Where the capital market is concerned, its watchdog, the Securities and Exchange Board of India (SEBI) faced one of its worst credibility crises in the two decades of its existence. Things came to a head with some explosive allegations levelled by its whole-time member (WTM) Dr KM Abraham, who was due to complete his three-year term in July. Dr Abraham alleged that UK Sinha was set to scuttle a few high-profile cases, including those against Reliance Industries, the Sahara group and the MCX group, under pressure from finance minister Pranab Mukherjee and his advisor Omita Paul.

It culminated in a bizarre PIL, challenging the SEBI chairman’s appointment, which dragged almost until the end of the year, when it was dubbed a publicity-seeking move by the Supreme Court and dismissed as withdrawn. The many letters and affidavits filed in the process by SEBI and the finance ministry exposed the arbitrariness of SEBI appointments. It also raised questions about why top posts at SEBI are so coveted that the failure to extract an extension triggers such resentment.

On the positive side, evidence of SEBI’s capricious and pro-National Stock Exchange (NSE) regime under CB Bhave was exposed through judicial and quasi-judicial decisions. For instance, the Competition Commission of India (CCI) ruled against the NSE and imposed a hefty fine (Rs55 crore) on it for refusing to levy transaction charges in the forex derivatives segment. While the NSE has challenged the judgement, it has also begun to charge a transaction fee. This is an issue that went to the CCI only because SEBI refused to check NSE’s misuse of monopoly profits. Similarly NSE’s allegation about problems with the broker front-office software of Financial Technologies (of the rival MCX group) had to be argued before the Bombay High Court because SEBI refused to intervene. Tellingly, NSE quickly settled this and other litigations with MCX, once it was clear that Mr Bhave and his core team would not continue at SEBI.

The effect of laundering SEBI’s dirty linen in public is the admission of problems with various systems and processes. Chairman UK Sinha admitted that SEBI’s consent orders have not been consistent. This is an understatement. Fortunately, for investors, a PIL has challenged the statutory legitimacy of SEBI’s consent order system and SEBI has stopped issuing fresh consent orders until the Delhi High Court decides the issue.

Similarly, an internal email sent out by the new executive director in charge of vigilance acknowledged an open secret—that certain ‘consultants and advocates’ who are seen frequently at SEBI and are in touch with officials, can swing deals and fix settlements. The email angered SEBI insiders, but a recent reshuffle of dozens of portfolios suggests that SEBI is acting on the feedback it has received.

SEBI has also restructured many of its committees, including the one that ratified consent terms. Only time will tell whether the changes will strengthen SEBI or is it just a case of a new chairman bringing in his favourite people into key functions and advisory committees.

A third positive is SEBI’s acknowledgment that complicated and varied Know Your Customer (KYC) rules are a big source of harassment. It has finally asked for uniform KYC norms across market intermediaries. It also plans to centralise KYC processes so that investors do not have to complete separate compliance procedures with each intermediary.

The bad news is that the negatives outweigh the positives. Despite the litigation and embarrassment, there is no evidence whatsoever that lessons have been learnt. One way of ensuring that SEBI chairmen do not act in a partisan manner would be to make SEBI directly accountable to the Parliament. So long as SEBI’s decisions can be ‘managed’, neither government, nor business nor market intermediaries want the regulator to be any more transparent.

Unfortunately, small investors are not waiting. They have chosen to exit the capital market by the millions over the past two decades of economic liberalisation, and the 8 million Indians (as against 20 million in 1992) who still invest in the market are too dispersed or disinterested to have a united voice.

Another brazen development over the past four years was the blatant use of advertising muscle by market intermediaries to ensure positive editorial coverage or silence. The Tatas and Ambanis needed a Niira Radia to teach them how to use their advertising muscle and regulatory powers to control the media, but powerful market players used this most skilfully. Since most top media companies are either listed or amenable to the diktat of advertisers, the strategy worked perfectly for them.

Another sad consequence of UK Sinha constantly having to look over his shoulder is the absence of bold initiatives to revive the market or make it safer for investors. For instance, the mutual fund industry is in the doldrums absolutely. Mutual fund CEOs have finally given up the pretence that endless seminars to hard-sell their products directly to retail investors would work.

Most funds have no strategy or game plan to reach investors, except through intermediaries and the regulations make it difficult for them to reward these intermediaries. Consequently, while SEBI may have struck at mis-selling by intermediaries and financial advisors to gullible investors, it hasn’t found a way to reach them either. A negative market sentiment and high interest rates have ensured that money is rushing out of the fund industry into bank fixed deposits.

The lack of understanding of the situation on the ground is evident from UK Sinha’s determination to press ahead with complicated regulations for financial advisors. SEBI fails to understand that individual advisors these days have hardly any clients; those who do, certainly haven’t retained them by providing wrong advice. If the market watchdog wants a clean-up, it must go after television channels which are spewing out hot tips or investment advice on stocks, insurance and mutual funds, tailored to benefit large advertisers.

But these are specifically allowed to escape advisor regulations. When Moneylife Foundation screened an explosive documentary called “Brokering News” that exposes the phenomenon of paid news, the representative of a leading brokerage house pointed out how the biggest media houses sell their awards for financial performance. He said, firms look at the purchase of these awards as part of a one-time brand-building budget and that is why no market intermediary ever wins the awards for two consecutive years. But the awards certainly fool gullible investors. Is the regulator unaware of this? Clearly not. But going after powerful media houses is a difficult task.

Will 2012 be different? So far, there is little indication that we will do anything but muddle along.

Sucheta Dalal is the managing editor of Moneylife. Subscribers get free help in resolving their problems with select providers of financial services. She can be reached at [email protected]